Wealth management mergers and acquisitions dropped slightly in 2023 but remained close to the industry’s high set in 2022 despite a contraction in the broader M&A market, according to Echelon Partners.

The company's annual report, released today, registered 321 transactions last year, a 5.6% decline from 340 in 2022. The average assets under management per deal, which Echelon Senior Vice President Barnaby Audsley said is often used as a proxy for valuations, rose to $1.668 billion, a 2.8% increase over 2022.

The report is a followup to a summary released last month.

Registered investment advisors were the acquirers in 71.3% of the transactions, with the most prolific acquirers being Wealth Enhancement Group with 16 deals, Mercer Advisors with 11, Captrust and Savant Capital Management with nine each, and Beacon Pointe Advisors with eight.

Despite the downtick in M&A numbers, Audsley said that when taken in the context of the larger contraction of the overall M&A market, the wealth management industry has been extremely resilient and continues to attract investors looking to benefit from the very positive attributes of these businesses.

“It’s not always appreciated just how resilient the wealth management industry was in largely a down year for M&A,” he said. “I think that is generally supportive of the theme that it’s a sweet spot not only within financial services, but within the general business ecosystem in general versus other verticals out there.”

The role of the advisor in protecting client assets in volatile markets, enabling their revenue and profitability to survive market troughs, he said, offers a compelling opportunity to investors as they weigh their options.

“Valuation multiples have stayed stable in this environment, while you’ve seen others, especially in the technology sector, get crushed,” he continued. “That lends itself to investors looking at this industry, looking at revenue and profitability, and realizing this is an attractive place to allocate capital.”

While 321 M&A deals were reported, the actual number could be three to four times that number, the Manhattan Beach, Calif.-based investment banking firm said, as many transactions go unreported. Tracking what is reported, however, remains an important metric for the industry, Audsley explained.

For example, last year’s tally made it the third consecutive year that the industry logged more than 300 deals. Before 2021, the industry saw annual deals between 100 and 200 as the norm. “If we were to remain at 300 for the next five years, I think that would be more of a cause for concern than a small decline between one year and the next,” he said.

The report also found that the number of transactions involving advisories with $1 billion-plus in AUM remained above historical norms as well, despite the higher cost of capital due to higher interest rates.

“The resiliency in this activity may also be a sign of increased creativity in deal structures adopted by firms striving to complete investments,” the report said. “Structured minority investments, with features such as paid-in-kind or preferred distribution rights, have become more popular in the largest transactions.”

Looking ahead, the Echelon report predicted 2024 will be another robust year for advisory M&A, given the strength of growth prospects, the fragmented market and an ample supply of both buyers and sellers.

On the sell-side, the report noted a surprising response to the economic uncertainties of 2023. Instead of waiting out the volatility by postponing a sale, sellers forged ahead to execute succession-planning strategies, either fully or partially. This trend should continue, the report said.

On the buy-side, buyers building direct relationships for deal origination instead of just relying on an investment bank will give them a distinct advantage in deal economics, as at least some of their acquisitions would be non-competitive.